LOMBARD, Ill.–One analyst sees a basic growth issue for credit unions in 2008–checking accounts.
Mark Riddle, senior research analyst for Raddon Financial Group, said growth is a “single-minded focus” for most credit unions, especially those with community charters.
“For credit unions to address the issue of growth, they must address the issue of checking,” he appraised.
Riddle said recent RFG research found 44% of households reported the most recent product opened at a financial institution was a checking account. One very large problem, he continued, is credit unions have not differentiated their checking offerings for some time. In years past, credit unions offered free checking and banks did not, which set CUs apart. But free checking has “swept the land,” and banks have more branches, making a difficult value proposition for credit unions, he asserted.
“Credit unions are opening more branches, and are almost keeping up with banks on convenience, which is an important factor with a checking account. The challenge is to come up with ways to differentiate checking. Another way to grow is by making your checking different or better than just ‘free.’”
One way to accomplish differentiation: Riddle said consumers place a high value on receiving free checks from their financial institution; he cited one bank that has been touting an offer of free checks “for life.” Other tips: people want cash rewards for using their debit cards and want their ATM surcharges rebated.
Sounding Like Everyone Else
“When credit unions just offer free checking, they sound like everybody else. Upscale households, those with over $100,000 in annual income, want to earn interest on their checking accounts,” he added.
Most credit unions are growing deposits via certificates, a strategy he acknowledged can generate growth–but also drive up the cost of funds and drive down earnings. An alternative savings product that appeals to many consumers is a money market account, he advised. Riddle said money market accounts offer members a “pretty good” interest rate, but with the flexibility to move money.
“The problem is, many credit unions have only one solution–a tiered-rate money market account,” he said. “It is hard to advertise because it has many tiers.”
Raddon Financial Group recommends CUs offer a tiered-rate product and a non-tiered product, he said. The reason: the only way to grow a tiered-rate product is raising interest rates on all the tiers, which increases costs. Riddle said an alternative is to offer a non-tiered money market product with a minimum deposit of $25,000.
“Pay a higher rate of interest for the same balance level as the tiered-rate product to increase the minimum deposit,” he said. “If credit unions ask people for a minimum of $25,000, they will end up with an average of $40,000 or more. The point is to get a bigger share of the member’s wallet.”
Contrary to most predictions for the coming year, Riddle said RFG foresees a shifting away from consumer lending and into real estate lending, such as mortgages and home equity lines. He said the numbers tell the story: in 1997, the total of all real estate loans in the U.S. was $76 billion, while all other loans were nearly twice as much at $150 billion. Today, there are $258 billion in real estate loans, compared to $259 billion in all other loans–close to a 50/50 split.
“This is a big shift as consumers have shifted to real estate as the cheapest form of lending,” he explained. “If they can get a loan secured by property, they pay less than other forms of loans. Consumers use a home equity loan for consolidation, rather than a having a credit card or a car loan.”
The state of the housing market is “geographical,” noted Riddle. He believes it is difficult to determine if housing prices have reached the bottom, but said RFG is not seeing any slowdown in equity lending.
Some areas, such as California, are seeing sharp price declines and foreclosures, Riddle acknowledged. However, he said in the Midwest and some other regions people still have significant equity in their homes.
“Home equity lines are a good product for credit unions to be in right now, especially a combination equity,” he counseled. Riddle said with a combination equity product, the credit union determines the dollar amount of the line of credit a member qualifies for, such as $75,000, and the member decides how he or she wishes to use it. For example, a member might take a $50,000 fixed-rate equity loan, and defer making a choice on the remaining $25,000 until later.
“The combination equity line is a differentiated product that appeals to consumers. Not many credit unions have implemented it, but the ones that have seen good growth in their equity portfolios,” he said.
Consumer confidence has been steadily declining in recent months, which Riddle cited as important because consumer confidence typically is an indicator for the lending sector,
“If they aren’t confident, they are less likely to borrow. It is a big issue without a clear solution. Foreclosures, subprime issues and other problems with mortgages are shaking consumer confidence in general, unless things improve.”
Two Other Opportunities
On the opportunity side, Riddle pointed to online banking and bill payment. He said not many credit unions–or banks, for that matter–have capitalized on online loan generation or deposit gathering.
“A lot of that has to do with ease of use. We’ve got to streamline the process and make it easier for our members to open up deposits online or get approved for loans online. If it is as difficult or more difficult compared to in branch or on the phone, people will just come in or call. There are a lot of people using online banking and bill pay, but they are not using online deposits or loans.”
